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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

More evidence on the dangers of increasing CGT

Written by Richard Teather | Wednesday 09 June 2010

More evidence that increasing the capital gains tax (CGT) rate means less money for the Treasury, not more.

Nigel Lawson increased the rate in 1988, aligning CGT with income tax (sound familiar?). What happened to the tax receipts? An immediate fall of 17.6%, and a further fall the following year. Overall the Treasury’s CGT yield fell by nearly a quarter over two years, despite the stock market growing.

Here’s the numbers:

Tax Year CGT rate £m    
1987/88 30% 2,175
1988/89 40% 1,792
1989/90 40% 1,658

Source: HMRC Table 14.1

CGT receipts didn’t get back to their old level until 1999, when Gordon Brown’s taper relief effectively lowered the tax rates. As we’ve said, higher rates don’t just damage the economy and destroy jobs – they collect less tax for the Treasury than low rates.

And that was just an increase from 30% to 40%, much smaller than the doubling (or more) that is being suggested now. If you’ve been reading other commentators, there is some incorrect data floating round claiming that CGT receipts increased when Lawson increased the rate. That is based on a misunderstanding of the tax system. Yes, Treasury data shows CGT receipts increasing in 1988/89, but CGT is collected a year (or more) in arrears, so the cash the Treasury received in 1988/89 was the tax for 1987/88, the last year of the 30% rate. The figures I have shown here match the tax collected to the year the sales took place, and so to the correct rates that were applicable. 

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Is there more bad news out there?

Written by Richard Teather | Wednesday 09 December 2009

As I said, the Chancellor’s estimate of his deficit for this year has risen again. Back in the 2008 Budget he predicted that this year’s borrowings would be £38 billion. In the autumn 2008 pre-Budget report he increased it to £118 billion. In the spring 2009 Budget it jumped to £175 billion, and now he is predicting £178 billion.

But in the 2009 Budget he was expecting the economy to contract by “only" 2.75% this year, and now he concedes that the true contraction will be 3.5% - an additional 0.75%. Surely an extra 0.75% fall in GDP would increase borrowing by more than £3 billion?

Let’s do a quick comparison.

A year ago, in the 2008 pre-Budget report, Darling estimated that GDP would fall by 0.5% this year, giving an estimated deficit of £118 billion. By the spring 2009 Budget the estimated fall in GDP was 2.75%, and the estimated deficit £175 billion. So an extra 2.25% fall in GDP gave an extra deficit of £57 billion.

OK, it’s only a crude calculation, but on that basis I’d expect today’s extra 0.75% fall in GDP to result in an increase of £19 billion in the estimated deficit, taking this year’s deficit to £194 billion.

That’s close to the £200 billion that various economic analysts were predicting recently, based on the Treasury’s monthly figures for tax collection. Hmm.

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Just how big is the deficit?

Written by Richard Teather | Wednesday 09 December 2009

After a decade of Gordon Brown spouting billions everywhere, it hardly seems like a big amount any more. But ten billion here, another twenty billion there, and before long it starts adding up to serious money.

To put it in context, the National Debt pretty much started with the Napoleonic War, about 200 years ago. From then to 2000, the total cumulative debt run up by all the governments over that period came to just over £300 billion.

Darling is proposing to borrow that much, not in 200 years but in just 20 months.

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Record deficit

Written by Richard Teather | Wednesday 09 December 2009

So the estimated deficit for this year has been increased, from £175 billion to £178 billion – the biggest deficit ever for the UK government. That’s 12.6% of GDP.

Frankly we’re unlikely ever to pay that off, especially with the government predicting more deficits every year for the foreseeable future, so we’ll be paying interest on that debt forever.

If interest rates go up to 7% (hardly unlikely), we will be paying about £12.5 billion interest each year, just on this year’s borrowing – never mind all the accumulated borrowings from previous years and all the extra debt the government is planning for the future.

That’s about 3% on VAT, forever, just to pay the interest on this year’s deficit.

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Eyes down for the oddest pre-Budget report ever

Written by Richard Teather | Wednesday 09 December 2009

So with the worst government deficit ever, the Chancellor’s main proposal is – to help pensioners by reducing Bingo Duty from 22% to 20%.

How sweet.

Is the Chancellor completely out of his depth, or is this a sign that he has won a titanic struggle against demands from the Prime Minister for huge tax increases on the “rich"? I guess we won’t have to wait long for their memoirs to be published to find out.

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Cut public spending by a third

Written by Richard Teather | Tuesday 07 July 2009

Sir John Major, former Chancellor (and ex-PM) said at the weekend that public spending should be reduced by a third, including cutting the number of civil servants and ministers.

That would mean reducing government spending from nearly £700 billion to around £450 billion. Since the Treasury expects to collect just under £500 billion of tax this year, it would turn the monstrous £175 billion borrowing into a surplus of about £45 billion.

I’ll let you play fantasy Budgets, but that surplus would be more than enough to abolish council tax, fuel duty, or corporation tax, or increase the tax-free personal allowance to £15,000.

So Major’s proposed cut would mean significant tax cuts as well as a balanced Budget instead of record debt.

That sounds like an incredibly radical measure, even though a necessary and desirable one. But is it really (as I am sure the public sector unions will scream) a savage cut that would cripple public services, or is it a feasible, moderate policy?

Let’s look back a few years, to before the recent government profligacy.

In 2000, three years into the Labour government and with “Prudence" Brown as Chancellor, total government spending was just under £350 billion. Increase that by inflation, and it would be about £450 billion next year.

So the radical-sounding cut of one third of public spending just means that the government does what it did in 2000, with its costs increased by inflation. Is that really so difficult?

Just think of all the wonderful things that the government does now, that it didn’t do in 2000 (go on, try). Are they worth beggaring the country for?

As Tom blogged here last week, “all that extra cash has achieved more or less nothing." Well – except for a crippling public debt!

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Balancing the budget

Written by Richard Teather | Thursday 18 June 2009

money1Apparently the Tories are going to cut public spending by 10%. But are they really? Assuming a May 2010 election, and a bit of time to get organised, that should mean cutting Darling’s proposed spending for 2011/12 from £717 billion to £645 billion.

Except that they aren’t going to cut education, or health, or overseas aid. And they can’t cut debt interest or payments to the EU. And they are only proposing to cut departmental expenditure, not benefits, pensions or tax credits. So in fact the Tories’ supposed 10% cut is actually barely 3%, from £717 billion to £695 billion.

That leaves the Tories’ spending more than Labour’s record £671 billion this year. Even allowing for inflation, the Tories propose to spend more than Labour ever spent. You call that a cut? Pathetic.

So what can be done to balance the Budget?

The Treasury estimates that taxes will bring in £577 billion in 2011/12, but frankly no-one else does. Lets assume that we’re not going to get any more than 2008/9’s £530 billion. So what would we have to do to balance the Budget at that level, instead of Darling’s insane plan to borrow £111 billion?

Well, four years ago (2005/6), government spending was £523 billion. Take spending back to that level, and we would have a surplus. Remind me, who was the Chancellor who thought that £523 billion was a generous level of public spending just four years ago?

OK, those calculations don’t allow for inflation. So let’s go all the way back to 2002/3 – five years into the Labour government. Then the government’s total spending was £425 billion. Add on inflation, and that would cost about £515 billion by 2011/12, leaving a £15 billion surplus.

So balancing the Budget, without any tax increases, means the government just has to do what it did in 2003. Is that really so difficult?

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The biggest budget deficit ever

Written by Richard Teather | Thursday 23 April 2009

£175,000,000,000. That's how much extra debt Darling proposes to load onto us this year, in the biggest Budget deficit ever.

Brown accused the Tories of unfunded tax cuts in the argument over reform of inheritance tax. But their doubtfully-funded proposals amounted to £2 billion. What about £175 billion of unfunded spending - over a quarter of all government expenditure?

Worse, Darling proposes a further £173 billion deficit next year. And that's assuming that we come out of recession before Christmas; if not, the deficit will probably be more than £200 billion.

Nor is this a short-term problem caused by the recession.

The recession has exposed a long-term problem that had been hidden by the previous boom. As I said yesterday, Brown presided over an enormous increase in government spending (to little discernable benefit), which even the huge tax receipts from the City and the property industry during the boom were not enough to fund.

And what does Darling propose doing to get us out of this problem? Nothing.

The proposed 50% tax rate for the rich (more on that shortly) serves no purpose other than Brown's political manoeuvres. Even on the Treasury's optimistic assumptions it will raise only £1.8 billion per year, a trivial 1% of the deficit.

No, the only thing he can do is fiddle with the figures. By increasing his estimate of long-term growth, claiming that he expects the economy to grow by 3.25% per year after next year, Darling was able to say that the public accounts would eventually be brought back into line. But that growth level looks unrealistic; in 2002, Gordon Brown's estimate of long-term growth was just 1.75%. Have things really got so much better now?

So we are faced with deficits for the foreseeable future. Over the next five years the government plans to borrow more than £700 billion. Anyone who intends to stay in the UK after that is going to have to pay for this folly.

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Today's budget in context

Written by Richard Teather | Wednesday 22 April 2009

As we head towards the UK government's biggest Budget deficit ever, a black hole of at least £118 billion, can anything be done about it?

No, raising taxes on the rich is the wrong answer (I will blog later about why). The problem is simply that government spending has grown out of control.

For a while Brown's booming spending was almost hidden by the booming economy, which almost raised the taxes to pay for it. But now the boom has turned to bust the true state of the public finances is revealed.

In 2000, when we were already three years into the Labour government, the government spent £343 billion. This year it plans to spend £653 billion: nearly twice as much.

Just what are they spending all that extra money on? What useful things does the government do now that it didn't do in 2000?

If spending has nearly doubled, are schools educating twice as many pupils? Are hospitals treating twice as many patients?  Are the police catching twice as many criminals? Of course the government has statistics to suggest that various things have improved, but most of us who actually use public services would say that overall they are much the same as in 2000.

But if little has changed, why has the cost doubled?

Even if we allowed for inflation since 2000, government spending would now be just £407 billion - £246 billion less than this year's proposal. That's enough to wipe out the deficit, abolish VAT entirely, cut corporation tax to match Ireland's 12.5%, and abolish Council Tax, and still have £10 billion spare.

So you can have today's public services, today's taxes, and a government debt that will cripple our economy for a generation. Or we could have the public services we had in 2000, pay no VAT or Council Tax, have no deficit, and have one of the most competitive economies in Europe. Do you even need time to think about it?

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Tomorrow's budget

Written by Richard Teather | Tuesday 21 April 2009

What horrors are going to come out of this week’s Budget? Wrong question - think first about the horrors we know about. Darling has already announced that he will be borrowing £118 billion this year.

Of course that figure is hopelessly inaccurate. It was based on optimistic growth targets, which we aren’t going to meet; the final figure could be £160 billion. But even that doesn’t include the vast sums used to bail out the banks (which Darling claims he is going to get back one day), or the usual stealth spending (public sector pensions, PFI and so on). So the actual amount is going to be even higher. But never mind that for now; let’s just think about that £118 billion.

£118,000,000,000 extra borrowing, in just 12 months.

But governments do deal in huge numbers. Is that really so large? Yes, it is. About one pound in every five that the government spends this year will be unfunded. Borrowed, to be paid by future generations. If we closed down the entire NHS, that would just about balance the Budget. Alternatively, if we doubled income tax – so that most taxpayers pay 40% instead of 20%, and the better off pay 80% instead of 40%, that would almost raise enough money to plug the hole. Except of course it wouldn’t, because anyone who could would leave the country.

Even in government terms, £118,000,000,000 is a huge amount to borrow. But next year he plans to borrow another £105 billion. In fact over five years he plans to borrow £457 billion. And that’s just what he has admitted to; there will be much more hidden away.

To show the sheer scale of this government’s overspending:

  • It took past governments over 200 years, from the 1700s to 2000, to run up a cumulative debt of £300 billion.
  • Gordon Brown doubled that in just nine 9 years, borrowing another £300 billion between 2000 and 2009.
  • Darling plans to borrow a further £300 billion in just over two years.

The interest and repayments on this debt will be dragging down our economy for a generation.

Frankly I find it terrifying.

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